Introduction

What was agreed

Limitations and uncertainties

What lies ahead

Comment

Introduction

On October 6 2016, after years of protracted negotiations, the General Assembly of the International Civil Aviation Organisation (ICAO) passed Resolution 22/2, creating the first global market-based measure to attempt to contain aviation emissions. The measure, known as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), will take effect in 2021, be reviewed every three years and run until 2035. CORSIA is among a basket of measures aimed at reducing aviation emissions, including improved air traffic management and more energy-efficient aircraft, engine and fuel technology. Despite this unprecedented and groundbreaking progress by the ICAO, the new scheme has significant limitations, leaves questions unanswered and mechanics undetermined, and – in the view of many non-governmental organisations – does not sufficiently address the ongoing dangers posed by aviation greenhouse gas emissions.

What was agreed

Unlike the cap-and-trade system of the European Union's Emissions Trading Scheme (ETS), whereby aircraft operators are required to purchase and surrender permits to pollute and the allotment of free permits decreases over time, CORSIA requires operators in countries that are party to the scheme to offset their excess emissions above the 2020 baseline levels by purchasing qualifying carbon offset credits from greenhouse gas reduction and limitation projects in other industries. The first two phases of CORSIA, from 2021 to 2026, will be voluntary and countries may join or opt out of the scheme at any time. From 2027 to 2035 it will be mandatory, except for those countries, flights and operators specifically exempt from (and not voluntarily participating in) the scheme.(1)

Under the ICAO resolution, aviation carbon emissions will continue to increase until 2020, after which non-exempt emissions above the 2020 international aviation industry baseline must be offset. As of October 12 2016, 66 countries(2) comprising more than 86.5% of international aviation activity had indicated their intention to voluntarily participate in CORSIA from its outset. Many of the remaining ICAO member countries are either exempt or yet to commit to the scheme. Russia, India, Brazil, Saudi Arabia, Chile, Argentina and Venezuela have objected that:

  • CORSIA fails to further the goal of carbon neutral growth from 2020 as codified in the Paris Agreement under the UN Framework Convention on Climate Change; or
  • its implementation disproportionately burdens developing countries.

During CORSIA's voluntary phase, sectoral baselines will be set from 2020;(3) whereas during the mandatory phase, each operator will increasingly set its own emissions baseline using emissions data from either 2021, 2022 or 2023.(4)

Limitations and uncertainties

The term 'reduction' in the CORSIA acronym is a misnomer as the scheme makes no attempt to reduce aviation emissions, but attempts only to offset surplus emissions above baseline levels. Most of the technical and mechanical details of CORSIA have yet to be agreed, including:

  • the types of greenhouse gas abatement project that will qualify as eligible offsets for aircraft operators;
  • the measurement, reporting and verification of aviation emissions; and
  • the electronic registries through which offset credits will be held and transferred.

Current timeframes require these criteria, procedures and logistics to be ready for implementation by 2018. Significantly, CORSIA applies only to international flights – meaning, for example, that 60% of all flights departing and arriving in the United States are not covered by CORSIA. Domestic flights are regulated by individual national authorities under the Paris Agreement (a process that the US Environmental Protection Agency has recently initiated with its endangerment finding on aviation greenhouse gases). The penalties for non-compliance and the enforcement criteria to be utilised by member states are also undetermined, leaving uncertainty over the uniformity, efficacy and consistency of enforcement.

There is also uncertainty and debate as to which flights after 2020 should be covered under CORSIA and which flights may continue to be regulated under the EU ETS. The EU ETS remains in effect for non-exempt flights that originate and terminate in the European Economic Area (EEA) by all operators – regardless of domicile – until 2020, but this may soon be extended beyond 2020. International aviation emissions are regulated by the ICAO, and not by sovereign states or regional alliances such as the European Union. For example, under the ICAO's definition,(5) a flight from Paris to Frankfurt would be considered an 'international flight' and would thus be regulated under CORSIA.

While many observers and non-governmental organisations have indicated that CORSIA falls far short of what they consider to be ambitious and a regulatory system equivalent to the EU ETS,(6) the European Union and its member states appear to have reluctantly conceded that the deal reached in October by the ICAO is better than no deal at all, and that CORSIA can be improved through its mandated triennial review process. Some members of the European Parliament (MEPs) are concerned that, should global aviation emissions peak by 2020 and decline thereafter, no international operators or their governments will be required to offset any aviation emissions whatsoever.

What lies ahead

In early 2017 the European Parliament will debate CORSIA and its impact on EU ETS compliance beyond both January 1 2017 and 2020. It is widely expected that aviation will continue under the EU ETS until at least 2020, with application continuing in its current form to intra-EEA flights and the 'stop the clock' derogation remaining in place for intercontinental flight activities.(7) Some MEPs have discussed reintroducing 'full-scope' EU ETS compliance for international flights between the EEA and those countries that have declined to join the voluntary phase of CORSIA. Due to the perceived lack of ambition under the ICAO scheme, a strong faction is building in support of the EU ETS continuing in conjunction with CORSIA to cover EEA-domestic and regional flight activities. For now, the EU ETS remains in full force and effect for intra-EEA flights, operators are not permitted to offset emissions from these flights and allowances must still be purchased and surrendered annually (as opposed to the three-year compliance cycle contemplated by CORSIA).

Some MEPs are looking to tighten the EU ETS further, by reducing the aviation cap and eliminating free aviation allowances. For example, they argue that under the current EU ETS rules a flight from Paris to Brussels is subject to a 95% cap and distribution of mostly free aviation emissions allowances, whereas a train trip on the same route is subject to a reduced 45% cap and no free EU emissions allowances. In addition, aviation fuel is exempt from purchase tax and some politicians believe that aviation is unfairly subsidised.

Comment

Many observers believe that the ICAO's resolution to create CORSIA was the lowest common denominator to enable all parties to show a tangible result for their efforts, particularly since previously proposed global market-based measures envisioned a mandatory – rather than voluntary – scheme. With international aviation effectively being given the green light to continue increasing carbon emissions faster than technology can reduce them, non-aviation industries will have to redouble their efforts to compensate in order to have any chance of achieving the goals of the Paris Agreement by 2020 (or beyond).

For further information on this topic please contact Jordan Labkon at Vedder Price LLP's Chicago office by telephone (+1 312 609 7500) or email (jlabkon@vedderprice.com). The Vedder Price LLP website can be accessed at www.vedderprice.com.

Endnotes

(1) Exempt countries mainly consist of least developed countries, small island developing states and land-locked developing countries whose share of global revenue ton-kilometre activity falls below a minimal threshold. Exempt operations mainly consist of flights by aircraft with a maximum take-off weight of 5,700 kilograms or less, flights for humanitarian, medical or firefighting purposes or operators with annual carbon dioxide emissions of 10,000 metric tons or less.

(2) For a current list of voluntarily participating CORSIA member states, see www.icao.int/environmental-protection/Pages/market-based-measures.aspx.

(3) Referred to as '100% sectoral share'.

(4) Referred to as 'dynamic share', comprising a mix of sectoral and individual shares, with at least 20% individual shares between 2030 and 2032 and at least 70% individual shares between 2033 and 2035.

(5) The ICAO defines an 'international flight' as a flight containing one or more international stages. See www.aviationglossary.com/icao.

(6) For example, see "Opinion: Why ICAO's Emissions Deal Will Not Make a Difference", Aviation Week, October 22 2016 (aviationweek.com/commercial-aviation/opinion-why-icao-s-emissions-deal-will-not-make-difference); "ICAO GMBM Agreement a Hard-Fought Compromise and a First Step, Say NGOs, But Galls Short of Temperature Goals", GreenAir Online, October 25 2016 (www.greenaironline.com/news.php?viewStory=2297); and "ICAO: What is Going On?", Transport and Environment, September 2016 (www.transportenvironment.org/sites/te/files/publications/2016_09_ICAO_Just_what_is_going_on_FINAL_0.pdf).

(7) This will be debated by the European Parliament under Articles 14 and 15 of Regulations (EU) 421/2014.

Barry Moss, chief executive officer of Avocet Risk Management Ltd in Brussels, Belgium, assisted in the preparation of this update.

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